Wallace R. Weitz, a follower of Warren E. Buffett's investment strategy, spent about $200 million on shares of Wal-Mart Stores Inc. and Tyco International Ltd. in the second quarter as he tried to revive his Weitz Value Fund.
The $4 billion fund, one of its category's best performers for much of the 1990s and during the three-year bear market that ended in 2002, is down 7 percent this year. Weitz Value ranks 95th in its class of 96 funds tracked by Bloomberg, beating only the $34.4 million Dreyfus Premier Select Fund.
Struggling through periods of decline is "the price of being a long-term contrarian," favoring beaten-down stocks, Weitz said in an interview from his office in Omaha, also home to Buffett. "That's the way investing works."
Weitz bought shares of Wal-Mart, the world's largest retailer, and Tyco, the world's biggest producer of electrical connectors and the No. 2 maker of medical supplies, as he reduced holdings in hotel companies such as Host Marriott Corp. and Hilton Hotels Corp. after they reached his price limits.
Weitz has managed the fund since 1986 and sticks to the value-investing philosophy developed by the late Benjamin Graham and adopted by Buffett, who is the world's second-richest man, according to Forbes magazine's annual survey. Weitz buys shares of companies he views as inexpensive that have products or services he understands as well as excess cash and limited competition.
During the past 10 years, Weitz Value has risen at an average annual pace of 12 percent, placing in the top third of its category. The Muhlenkamp Fund, headed by Ronald Muhlenkamp, was first with an average gain of 16 percent. The Standard & Poor's 500-stock index has returned an average 9.5 percent a year.
The 56-year-old Weitz first encountered Graham's theory as a student at Carleton College in Northfield, Minn., where he received a bachelor's degree in economics in 1970. He started managing money for other people in 1973, the same year he met Buffett, now 75, at a bridge game. His firm, Wallace R. Weitz & Co., today oversees $7 billion for clients.
Weitz's fund owns stocks for four to five years on average, reflecting his buy-and-hold approach. The 10 largest holdings -- all down this year -- accounted for 44 percent of assets as of June 30. Media shares, including newspapers, radio and cable television, made up 19 percent.
Buffett's Berkshire Hathaway Inc. was his biggest holding as of June 30, at 6.8 percent of assets. Weitz said he first bought shares of the insurance and investment company in the mid-1970s at $300 each. They now trade for $82,500 each.
Investors must be patient, Weitz said, adding that bets on financial services companies in 1999 and cable TV operators in 1996 -- both out of favor at the time -- paid off. These picks helped his fund weather the market drop from 2000 to 2002 and outperform the S&P 500.
"Don't invest in this fund unless you're thinking of the long term, which in this case means 10 years or more, and be prepared for the ups and downs," said Christopher Traulsen, an analyst at the Chicago-based fund research company Morningstar Inc.
One reason for the fund's sagging performance this year is a tendency to invest in larger companies, as smaller ones have done better, Traulsen said. Another is the lack of a significant stake in energy companies, this year's leaders in the S&P 500.
"After avoiding dozens of false alarms, we failed to respond to a real one," Weitz said, referring to the rally in oil and gas stocks. "But it would have been out of character for us to speculate."
Losses in two media companies, Washington Post Co. and IAC/InterActiveCorp, and two mortgage lenders, Fannie Mae and Countrywide Financial Corp., also hurt returns. Shares of all four are down more than 10 percent this year.
"The fact that some of these stocks are currently lagging the market is annoying, but perfectly normal," Weitz wrote in a July letter to shareholders. "We are often out of step with the popular crowd."
Weitz Value trailed the S&P 500 in 1999 because it favored banks such as Washington Mutual Inc. and GreenPoint Financial Corp., now part of North Fork Bancorp, instead of technology stocks. The fund gained 6.5 percent the next year, while the index fell 10 percent as computer-related shares collapsed.
Weitz spent $123 million on shares of Wal-Mart after they dropped on concern that an economic decline and rising gasoline prices would discourage customers from shopping.
Shares of the Bentonville, Ark.-based company are down 17 percent this year and closed Friday at $44.03. While second-quarter profit growth was the slowest in four years at 5.8 percent, Weitz expects earnings to increase at an annual rate of 12 to 14 percent as new stores open.
Tyco is a "case of a fallen angel," said Weitz, who spent $76 million on shares of the conglomerate. He has followed the company for the past three years, through a scandal involving looting and fraud by top executives. Former chief executive L. Dennis Kozlowski and his former top deputy, Mark H. Swartz, were sentenced to prison on Sept. 19.
Edward Breen, Kozlowski's successor, is improving Tyco's finances, Weitz said. The company's management has set a goal of generating 12 percent growth annually in earnings and free cash flow, or funds available for purposes such as paying dividends and buying back shares.
"We're very impressed," Weitz said. He expects shares of the company, run from West Windsor, N.J., to generate a return of 50 percent in the next two to three years. Tyco's shares have lost 9.6 percent this year and ended the week at $27.35.
The investment is another connection between Weitz and Buffett. Berkshire Hathaway bought 5 million shares for $151.3 million in the second quarter, two months after Tyco reduced its 2005 earnings forecast to reflect increased commodity costs.